For many in the public sector, the review of pay and conditions after five long years has been worth the wait. The average salary increase of the order of 36.9 percent recommended by the Pay Research Bureau (PRB) will come as a relief for public sector employees who have seen their purchasing power seriously dented by high inflation. It is estimated that the overall PRB package will cost around Rs5.2 billion, an increase of 126 percent over the previous public sector pay revision in 2003. Given the scale of the salary increases, the PRB recommendations will be implemented in two phases: 75 percent of the pay rise, costing Rs3.9 billion, will be effected as from July 2008 and the remainder in 2009.

The amount of the payout represents a massive injection of liquidity into the economy and if the declining savings pattern and conversely, the rising consumption trends in recent years are anything to go by, then a significant impact on consumer demand can be expected. Rising domestic consumption may help to dampen the potential effect of the global economic slowdown on economic growth and job creation. But concurrently higher consumer demand in the advent of an inadequate supply response may well create inflationary pressure, prompting the Bank of Mauritius to raise interest rate and triggering increased wage demands notably from trade unions in the private sector. Given our high propensity to import, there may also be a negative bearing on the trade deficit with implications for the exchange rate of the rupee.

<I>?One important objective of the salary review is to attract and retain high calibre professions in the public sector. For middle and top management executives, the pay increase granted will compress the pay differentials between public and private sectors and could curb the brain drain...?</I>

One important objective of the salary review is to attract and retain high calibre professions in the public sector. For middle and top management executives, the pay increase granted will in effect compress the pay differentials that exist between the public sector and private sector and could curb the brain drain in the public service. At the lower end of the occupation and income ladder, the PRB salary adjustments may well lead to a pay differential in favour of public sector employees. In both cases, a positive spillover effect on salaries in the private sector can be expected as employees seek to restore or reduce the sectoral pay differentials over time.

Considering the proposed new salary scales across occupations within the public sector, the PRB recommendations could result in the widening of the gap between the different occupational grades. While the move may lead to frustration in some quarters, it also aims at providing an incentive for employees to invest in training and education, improve effort and performance and work harder for promotion.

The PRB report not only proposes a new salary and benefits structure for the public sector. It also recommends a modern approach to human resource management akin to private sector enterprises that favours productivity, quality of service, efficiency and flexibility. It also lays emphasis on the need for training and calls for more professionalism on the part of public sector employees. It is hoped that this may lead to a much improved public administration that will contribute to building a conducive business environment for higher investment and growth.

Another important feature of the report is the new contributory pension scheme and the extension of the retirement age to 65 years. The reform of public pension should enhance the long term sustainability of the system and prevent the crowding out of Government development expenditures in the future. The reform is also important ensure the payment of an adequate pension to employees upon retiring from the public sector.

As far as financing the increased wage bill is concerned, it would appear that Government may have ruled out an increase in tax rates, especially for VAT, relying instead on increased tax revenue generated from the expansion of economic activity. In this context, there is every chance that the focus of the Budget 2008-2009 will be on promoting long term sustainable growth. However, we do remain prone to external shocks and in case the economic situation were to deteriorate, Government may then look at alternative means such as letting the budget deficit rise and/or diverting resources from its development and social budget.

The PRB report calls for a change in mindset and for the implementation of important reforms to public sector management so that it can effectively support the ongoing broad- based economic reforms and contribute to the economic development of the country. There will be, from now on, high expectations from the part of the public and business as they await the emergence of a modern public sector with ?clearer accountability?and for services to be provided effectively with competency, commitment, courtesy, speed and integrity.?

Dr Vishal RAGOOBUR</B> Economist Mauritius Employers? Federation</I>